ABC: An Introduction to Vendor Management

CIO —

• What is the overarching trend in vendor management today?
• How should I prioritize the time I set aside to deal with vendors?
• What’s the evidence that forging more strategic, collaborative relationships with vendors actually works?
• How do I think about and negotiate pricing issues with vendors?
• Beyond details about pricing, delivery dates and such, what can I put into my contracts to help foster good buyer-vendor relationships?
• I need to cut the cord with a vendor. What should I do?

What is the overarching trend in vendor management today?

Do it in-house or pay for an outside pro? That’s the question at the core of any vendor management discussion. In thinking about the answer, it’s important to consider plunging prices for hardware and the software revolutions of plug-and-play modularity, Web-based services and open source—all of which serve to drive down do-it-yourself costs. Yet in the final analysis, in 2007 it often makes more sense than ever to assign IT-related tasks to external contractors.

To understand why, it’s useful to start with the ideas of nonagenarian economist Ronald Coase. More than a half-century ago, Coase offered a brilliantly simple explanation as to why companies and firms ever emerge from the vast sea of sole proprietorships that form the grist of any free market economy. After all, it seems that all entrepreneurs in an efficient open market should assemble their businesses from high-skilled, low-cost specialists willing to work on a contract basis.

Coase notes, however, that turning to the open market is rarely as easy as it sounds. All too often, he explains, once entrepreneurs factor in the cost of finding the specialists in the first place, then bargaining with them, and finally policing and enforcing their agreements, having a stable of in-house employees suddenly seems like an attractive option.

Of course, building a company, a vertically integrated mini-fiefdom, is hardly a cost-free endeavor. Coase says that, as a firm grows, administrative overhead invariably encroaches on the time the entrepreneur can devote to core creative work. And as boxes are added to the org chart and in-house complexity grows, even the best managers are prone to making mistakes.

Weighing these internal and external costs helps explain the number and size of firms, Coase writes in his 1937 essay “The Nature of the Firm”—analysis that still rings true today. What’s changed is that, thanks to increasingly global and transparent networks, it’s cheaper than ever to find and hire competent vendors.

How should I prioritize the time I set aside to deal with vendors?

Sometimes it’s a good idea to pause and remember that the idea of a C-level executive devoted to information technology is relatively new on the business scene. A search of The New York Times website for the term “chief information officer” in articles published in the last two decades of the 20th century yields slightly less than one mention per month. In the first six and a half years of the 21st century, the term garnered more than three hits per month in the Times.

Yet even though the notion of a strategic-thinking, six-figure-earning senior IT manager has gained currency, as a community CIOs sometimes adopt a somewhat defensive posture. After all, even today there’s no shortage of skeptics who say that IT is merely an undifferentiated commodity, like plumbing or electricity. (See Nicholas G. Carr’s “IT Doesn’t Matter” in the May 2003 Harvard Business Review as an example.)

Of course, plumbers and electricians don’t get paid to strategize and take sweeping organizational risks. And so perhaps it’s no surprise that a strong streak of conservatism runs through the ranks of CIOs. In fact, CIOs may spend upwards of 80 percent of their annual budgets on incumbent vendor fees and contracts—the rough equivalent of concentrating mostly on keeping the toilets flushing and lights on.

A better approach is to aggressively evaluate all vendors on their ability to add value and participate in the collaborative Web that stretches well beyond the boundaries of the business. “Today, most companies are networked businesses,” says Vallabh Sambamurthy, professor and executive director of the Center for Leadership of the Digital Enterprise at Michigan State University. “Not only must CIOs be involved in shaping their own business models, but they must also be vigilant about taking advantage of outsourcing, offshoring and other relationships with vendors in managing IT services.”

The trend, Sambamurthy says in a May 8 podcast, is for CIOs to make sure that all information technology investments, including money spent on external vendors, are driving future business growth opportunities.

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